Repatriation Tax Holiday Google Backs Raises Cost Concerns

Representative Kevin Brady introduced legislation that would give U.S. companies one year to bring home at a lower tax rate as much as $1 trillion in profits parked overseas. Photographer: Andrew Harrer/Bloomberg

May 12 (Bloomberg) -- A fresh legislative effort to allow
companies to return profits to the U.S. at a lower tax rate will
likely run into the same problems that have dogged repatriation
advocates in recent years: its cost and the lack of guarantees
that it will create jobs.

Repatriation legislation introduced yesterday by
Representative Kevin Brady, a Texas Republican, repeats most of
a 2004 law. It would allow U.S.-based companies to repatriate,
for one year, income earned overseas at a 5.25 percent rate
instead of the 35 percent statutory corporate rate. The money
that would flow to the U.S. -- estimated to be as much as $1
trillion -- would spur job creation and investment, Brady
maintains.

“This is about creating jobs, expanding U.S. businesses
and strengthening American companies,” he said yesterday in a
statement yesterday about the bill, which was introduced with
some Democratic support.

Companies including Microsoft Corp., Devon Energy Corp.,
Cisco Systems Inc. and Brown-Forman Corp. are part of a
coalition lobbying for a repatriation holiday. The House Ways
and Means Committee will hold a hearing today that will focus on
how tax rules affect global competition.

Estimated Cost

Democrats are countering Brady’s proposal with estimates of
the growing cost of a repatriation effort. Representative Lloyd
Doggett, a Texas Democrat who is a senior member of the Ways and
Means Committee, yesterday circulated an estimate from the Joint
Committee on Taxation pegging the cost of a repatriation bill at
$78.7 billion. An unsuccessful effort to create a similar
holiday in 2009 would have cost the U.S. government about $30
billion over a decade in forgone revenue.

“This means we will have to borrow more from foreign
creditors or shift a greater burden to American small businesses
and families,” Doggett said. Congressional estimators projected
that companies would repatriate about $700 billion if offered a
5.25 percent rate, compared with $300 billion during the tax
holiday enacted in 2004.

The estimate released by Doggett considers a general
repatriation holiday and not the legislation introduced by
Brady, who said he is seeking a review from the Congressional
Budget Office. Brady downplayed the earlier estimates.

Democrats also maintain that the bill does too little to
protect jobs at companies that repatriate overseas funds. They
have pointed to such examples as Hewlett-Packard Co., which
returned $14.5 billion to the U.S. at a low rate in 2004 and cut
its workforce by 14,500 employees in 2005.

Layoff ‘Disincentive’

The bill includes what Brady calls a “disincentive” for
layoffs, as it would penalize companies that bring home profits
at a lower rate and then reduce their workforce. Companies would
have to add $25,000 to their taxable income each time they cut
their total workforce below the company’s average.

With a 35 percent tax rate, the provision would increase
the company’s tax bill by $8,750 for each job cut. Edward
Kleinbard, a professor at the University of Southern California
School of Law in Los Angeles, said that won’t be enough to
discourage layoffs.

“It’s not a huge amount at all,” he said. “It’s just
misguided.”

Brady defended the provision as “reasonable” and said it
“makes the point that our goal is to create jobs and strengthen
jobs.”

Using the Money

He said he didn’t consider restrictions on how companies
could use the money they bring back to the U.S., leaving open
the possibility for businesses to use the funds to pay for
dividends or stock buybacks. Companies were criticized for such
tactics after the 2004 law was passed.

“It would be a mistake for Washington to create artificial
restrictions on the use of this when clearly the aggregate of
this investment is going to be very good for the economy,”
Brady said.

The bill faces obstacles in Congress. House Majority Leader
Eric Cantor, a Virginia Republican, supports a repatriation
bill, while House Ways and Means Committee Chairman Dave Camp, a
Michigan Republican, has said he wants to address the issue as
part of a comprehensive revision of the tax code. Treasury
Secretary Timothy Geithner has echoed Camp’s view.

Camp said today in a brief interview that “I’m for
repatriation, but I’m interested in comprehensive tax reform.”

He declined to say whether he would support the
repatriation proposal as standalone legislation if a tax
overhaul plan does not materialize in Congress.

‘Interim Step’

Cantor expressed support yesterday for considering a
repatriation proposal before a tax overhaul.

“While fundamental reform will take time, repatriation is
an interim step that we can take to encourage businesses to
bring investment back to our country,” he said in a statement.

The repatriation issue has received less attention in the
Senate. The Obama administration opposes a repatriation holiday.

Critics say the 2004 law didn’t lead to enough job creation
to justify the tax break.

“It was a major failure the first time around, and it’s
going to be worse this time,” said Chuck Marr, director of
federal tax policy at the Center on Budget and Policy
Priorities, a Washington organization that supports policies
that help low-income Americans. “You make it a regular
occurrence, you make it an incentive to shift profits and
investments overseas.”

Brady introduced the bill with at least three Democratic
co-sponsors, Representatives Jim Cooper of Tennessee, Jim
Matheson of Utah and Jared Polis of Colorado.